Seeking Alpha reporters indicated in a mid-November, 2021 investment article that an unnamed Bulgarian market analyst concluded that:
- The trust bought close to six million pounds of uranium on the spot market over the past month. August had the highest monthly trading volume for the past 25 years.
- Uranium spot prices are going parabolic and the trust has managed to do what Cameco and Yellow Cake failed to do in the past – corner the spot market.
- The big question is whether this pressure can be maintained in the future, with the end game being to see utilities returning to the market.
- The Reddit crowd has joined the game and Sprott Physical Uranium Trust has just upsized its ATM program to $1.3 billion, so I think the answer is yes.
Investment Thesis
The Bulgarian has written several bearish articles on uranium mining companies this year and many SA readers seem to think that he is bearish on the sector as a whole. This is simply not true, the reality is that he is picky and he has written bullish SA articles on NexGen here (+138%), Global Atomic here (+879%), Mega Uranium here (+396%), and Yellow Cake here (+99%). He also has published a bullish article on Uranium Participation Corp, which became Sprott Physical Uranium Trust this July. Spot uranium prices have had an incredible run over the past few weeks, largely thanks to significant spot market purchases by the latter. There are signs that the trust has managed what Yellow Cake, and Cameco here have been trying for several years – to corner the spot market. The story has been picked up by the infamous r/WallStreetBets subreddit and it seems this could be just the beginning of a strong run for uranium prices. In view of this, he remains bullish on Sprott Physical Uranium Trust and he considers it to be a relatively safe option to invest in the uranium market. Let’s review:
Overview of the operations and the uranium market
The aim of Sprott Physical Uranium Trust is to buy and hold physical uranium ore, thus providing investors with a vehicle through which to invest directly in this commodity. It’s structured as a closed-end trust and the annual management fee stands at 0.35%. There are also small operating expenses.
The trust holds a total of 24,914,382 lb of U3O8 as well as 300,000 KgU of UF6, which are valued at $1.13 billion as of the time of writing. Back in July, the assets under management were around $600 million, with a total of 18,194,658 pounds of U3O8. So, how did the assets under management (AUM) increase to $1.13 billion? Well, the trust gets fresh funds through at-the-market (ATM) offerings and it launched a $300 million operation in the middle of August. So far, it has raised $244.7 million and the proceeds have been used to buy almost six million pounds of uranium, sometimes more than 800,000 pounds in a single day.
See details from Sedar reporting ....
Keep in mind that the uranium spot market is small and such significant buying activity is equivalent to putting a whale into a swimming pool. The total uranium spot market volume in the month of August came in at 13.2 million pounds, thus marking the highest volume in a single month since 1996. The buying activity by Sprott Physical Uranium Trust also seems to have attracted new participants to the uranium market.
Best-selling authors like Jim Rickards, uranium company CEOs, as well as investors, have been talking about a new great bull market for years, and there have been attempts to corner the spot market in the past few years. Cameco started buying uranium on the spot market to fulfill its long-term contracts after it closed McArthur River in 2017. Yellow Cake was listed in London in 2018 and immediately soaked up 8.1 million pounds of uranium from Kazatomprom. Today, it owns close to 15 million pounds of uranium. Overall, he thinks it was just a matter of time before someone succeeded in cornering the spot market. In his November article on Uranium Participation Corp, he pointed out that there was a structural deficit in the uranium market but that it was impossible to forecast when this would lead to higher prices as the market is small and opaque and secondary supply is an unknown.
You could argue that high uranium spot prices are unsustainable because Sprott Physical Uranium Trust can’t keep putting the same pressure on the spot market as in August. However, my view is that this can be done as the trust has managed to attract significant retail investor interest. Uranium mining companies have become meme stocks thanks to r/WallStreetBets and multiple YOLO trades have popped up over the past few days. As an example, here’s a post by someone doing a $130k YOLO on Cameco.
Sprott Physical Uranium Trust is taking advantage of the interest and it has just amended its ATM prospectus, thus boosting the value of units in can issue to $1.3 billion. Investor interest is certainly there as the units are trading at a premium to the net asset value by more than 28% as of the time of writing.
Now then, why does he think that Sprott Physical Uranium Trust is a relatively safe option to invest in the uranium market? Quite simply, because the mining industry has a terrible track record of capital allocation and the current market valuations of uranium mining companies are unjustifiable from a fundamentals point of view.
Let’s take Energy Fuels here as an example. The company has a market capitalization of just over $1 billion as of the time of writing. It has less than 80 million pounds of low-grade uranium across several small projects, which he views as unlikely to ever make it to production. Note that these are resources and not reserves, and yet the company is valued at more than $12/lb.
Or even looking at Q2 financials of a uranium major like Cameco. The latter has a total of 454.5 million pounds of reserves and its market capitalization stands at $9.74 billion as of the time of writing. Each pound of reserves is valued at over $21. However, more than half of the reserves are located at the shutdown and technically challenging McArthur River mine. In addition to this, Cameco has inked long-term supply contracts that make sure that the company would be screwed at high uranium prices. Also see his discussion of November 23 on Cameco (more).
Investor takeaway
It seems that Sprott Physical Uranium Trust has managed to do what Cameco and Yellow Cake failed to do in the past – corner the spot market. The trust has used $244.7 million it raised through an ATM offering over the past month to put significant pressure on the uranium spot market and the price of the commodity has become parabolic.
The big question is whether this pressure can be maintained in the future, with the end game being to see utilities returning to the market. He thinks that the answer is yes as Sprott Physical Uranium Trust has recently upsized its ATM program and its units are trading at a significant premium to NAV. Considering the Reddit retail investor crowd has joined the party, I think it’s nearly impossible to come up with a price target for Sprott Physical Uranium Trust. he is content with saying that he remains bullish for the time being.
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